Ashley Asks A Question: What happens to your debt when you die?

What happens to your debt when you die- Guys, we're talking about a heavy topic here, so buckle in. We were recently talking about debt in the office (it comes up a lot when you work with finance geeks), and it made me wonder... what happens to your debt when you die? You're not around to pay it off anymore, so do the lenders write it off the books? Do they, in the words of Disney's Frozen, "let it go?"

Of course, if that's the case, wouldn't you just rack up a ton of debt if you learned you were going to die in six months?

"World, here I come!" - me with six months to live and a fabulous Visa sponsored vacation ahead of me.

For obvious reasons, it's hard to believe that banks would be okay with this.

So, as always in this series, I bring to you a burning question of mine that I’m too lazy to google. Let’s get to it.

What happens to your debt (credit card, car loan, mortgage, etc.) when you die?

Eddie Goepp, COO of Wela

Unfortunately the debt still has to be paid whether you’re dead or alive. Typically, the estate of the deceased owes the debt. Let’s use a mortgage as an example: If you were to pass away and owed $100,000 on your mortgage, then the assets in your estate must be used to satisfy the obligation. If your estate didn’t have enough cash available to pay the obligation, then assets must be sold (in this case your house) in order to pay off the loan.

If you have credit card debt, student loans or other consumer debt, then these obligations must be satisfied with proceeds from the estate as well. In this case, selling your home may be necessary to pay off a credit card or a student loan. In the event that your estate runs out of assets, the debt generally dies as well and the creditor must write it off as unpaid.

Some of your assets are safe from these obligations. Accounts like your 401(k), IRA or insurance contracts that have beneficiaries listed pass directly to those beneficiaries outside of probate, which is the process of verifying and carrying out your will. This highlights the importance of keeping your will up-to-date and making sure your beneficiaries are accurate too.

 

Bottom line: My world tour might work after all. It just depends on where I'm at in life, and if someone else is depending on my assets after I'm gone. Also, if Visa is reading this, don't worry, I'm in great health.